**UNITEDSTATES****SECURITIESAND EXCHANGE COMMISSION**

 

**Washington, DC  20549**

 

**Form 10-Q**

 

**ý****        Quarterly Report pursuant to Section 13 or 15(d) of theSecurities**

**Exchange Act of 1934**

 

**Forthe quarterly period ended March 31, 2004**

 

**o****        Transition Report Pursuant to Section 13 or 15(d) of theSecurities**

**Exchange Act of 1934**

 

**Forthe transition period from          to         **

 

**CommissionFile Number   0-26138**

 

**DendriteInternational, Inc.**

(Exact name ofregistrant as specified in its charter)

 

| **New Jersey**                                                   |   | **22-2786386**                         |
|------------------------------------------------------------------|--------|----------------------------------------|
| (State  or other jurisdiction of  incorporation or organization) |   | (I.R.S.  Employer  Identification No.) |

 

**1200Mount Kemble Avenue**

**Morristown,NJ  07960**

(Address,including zip code, of

principalexecutive offices)

 

**(973)425-1200**

(Registrant’stelephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months, and (2) has been subjectto such filing requirements for the past 90 days. ý

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Act): ý

 

As of May 3, 2004, 41,489,754 shares of Dendrite International, Inc. nopar value common stock were outstanding.

 

 

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**DENDRITE INTERNATIONAL, INC.**

**INDEX TO QUARTELY REPORT ON FORM 10-Q**

**FOR THE QUARTER ENDED MARCH 31,2004**

 
| **PART I.**    | **FINANCIAL INFORMATION**                                                                   |   |
|----------------|---------------------------------------------------------------------------------------------|--------|
|           |                                                                                        |   |
| **ITEM 1.**    | Financial Statements                                                                        |   |
|           |                                                                                        |   |
|           | Consolidated  Statements of Operations (unaudited)                                          |   |
|           | Three months  ended March 31, 2004 and 2003                                            |   |
|           |                                                                                        |   |
|           | Consolidated Balance Sheets                                                                 |   |
|           | March 31, 2004  (unaudited) and December 31, 2003                                 |   |
|           |                                                                                        |   |
|           | Consolidated  Statements of Cash Flows (unaudited)                                          |   |
|           | Three months  ended March 31, 2004 and 2003                                            |   |
|           |                                                                                        |   |
|           | Notes  to Unaudited Consolidated Financial Statements                                       |   |
|           |                                                                                        |   |
| **ITEM  2.**   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|           |                                                                                        |   |
| **ITEM 4.**    | Controls and  Procedures                                                                    |   |
|           |                                                                                        |   |
| **PART II.**   | **OTHER INFORMATION**                                                                       |   |
|           |                                                                                        |   |
| **ITEM 6.**    | Exhibits and Reports on Form 8-K                                                            |   |
|           |                                                                                        |   |
| **Signatures** |                                                                                        |   |

 

2

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PART I.                             FINANCIAL INFORMATION

 

ITEM 1.                             Financial Statements

 

**DENDRITE INTERNATIONAL, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(IN THOUSANDS, EXCEPT PER SHARE DATA)**

**(UNAUDITED)**

 
|                                |   | **THREE  MONTHS ENDED  MARCH 31,** |   |
|-------------------------------------|--------|-----------------------------------------|--------|
|                                |   | **2004**                                |   | **2003** |   |
| Revenues:                           |   |                                    |   |   |   |
| License fees                        |   | $                                       | 3,346  |   | $ | 2,562 |   |
| Services                            |   | 91,718                                  |   | 57,148 |   |
|                                |   | $                                       | 95,064 |   | $ | 59,710 |   |
|                                |   |                                    |   |   |   |
| Cost of revenues:                   |   |                                    |   |   |   |
| Cost of license fees                |   | 989                                     |   | 1,079 |   |
| Cost of services                    |   | 49,036                                  |   | 28,741 |   |
|                                |   | 50,025                                  |   | 29,820 |   |
|                                |   |                                    |   |   |   |
| Gross margin                        |   | 45,039                                  |   | 29,890 |   |
|                                |   |                                    |   |   |   |
| Operating expense (income):         |   |                                    |   |   |   |
| Selling, general and administrative |   | 32,966                                  |   | 20,239 |   |
| Research and development            |   | 3,022                                   |   | 2,698 |   |
| Other operating (income)            |   | (339                                    | )      | — |   |
|                                |   | 35,649                                  |   | 22,937 |   |
|                                |   |                                    |   |   |   |
| Operating income                    |   | 9,390                                   |   | 6,953 |   |
|                                |   |                                    |   |   |   |
| Interest income, net                |   | 7                                       |   | 243 |   |
| Other income                        |   | 43                                      |   | 9 |   |
|                                |   |                                    |   |   |   |
| Income before income tax expense    |   | 9,440                                   |   | 7,205 |   |
| Income tax expense                  |   | 3,776                                   |   | 2,882 |   |
|                                |   |                                    |   |   |   |
| Net income                          |   | $                                       | 5,664  |   | $ | 4,323 |   |
|                                |   |                                    |   |   |   |
| Net income per share:               |   |                                    |   |   |   |
| Basic                               |   | $                                       | 0.14   |   | $ | 0.11 |   |
| Diluted                             |   | $                                       | 0.13   |   | $ | 0.11 |   |

 

The accompanying notes are anintegral part of these statements.

 

3

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**DENDRITE INTERNATIONAL, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(IN THOUSANDS, EXCEPT SHARE DATA)**

 
|                                                                                                                                               |   | **March 31,  2004** |    | **December 31,  2003** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-----------------------------|--------|
|                                                                                                                                               |   | **(Unaudited)**          |    |                        |   |
| **Assets**                                                                                                                                         |   |                     |    |                        |   |
| Current Assets:                                                                                                                                    |   |                     |    |                        |   |
| Cash and cash equivalents                                                                                                                          |   | $                        | 41,396  |                        | $      | 30,405 |   |
| Accounts receivable, net                                                                                                                           |   | 62,239                   |    | 71,383                      |   |
| Prepaid expenses and other current assets                                                                                                          |   | 8,555                    |    | 8,483                       |   |
| Deferred taxes                                                                                                                                     |   | 8,844                    |    | 8,844                       |   |
| Facility held for sale                                                                                                                             |   | 6,900                    |    | 6,900                       |   |
| Total current assets                                                                                                                               |   | 127,934                  |    | 126,015                     |   |
|                                                                                                                                               |   |                     |    |                        |   |
| Property and equipment, net of accumulated  amortization of $47,063 and $43,946                                                                    |   | 28,019                   |    | 28,140                      |   |
| Other assets                                                                                                                                       |   | 2,120                    |    | 2,004                       |   |
| Long-term receivable                                                                                                                               |   | —                   |    | 3,157                       |   |
| Goodwill                                                                                                                                           |   | 76,666                   |    | 70,403                      |   |
| Intangible assets, net                                                                                                                             |   | 19,672                   |    | 18,574                      |   |
| Purchased capitalized software, net                                                                                                                |   | 1,513                    |    | 1,666                       |   |
| Capitalized software development costs, net                                                                                                        |   | 6,240                    |    | 6,126                       |   |
| Deferred taxes                                                                                                                                     |   | 6,372                    |    | 6,372                       |   |
|                                                                                                                                               |   | $                        | 268,536 |                        | $      | 262,457 |   |
| **Liabilities and Stockholders’ Equity**                                                                                                      |   |                     |    |                        |   |
| Current Liabilities:                                                                                                                               |   |                     |    |                        |   |
| Current installments of long-term debt                                                                                                             |   | $                        | 834     |                        | $      | — |   |
| Accounts payable                                                                                                                                   |   | 7,983                    |    | 4,990                       |   |
| Income taxes payable                                                                                                                               |   | 4,694                    |    | 6,194                       |   |
| Capital lease obligations                                                                                                                          |   | 722                      |    | 1,033                       |   |
| Accrued compensation and benefits                                                                                                                  |   | 15,810                   |    | 16,104                      |   |
| Accrued professional and consulting fees                                                                                                           |   | 7,238                    |    | 7,842                       |   |
| Other accrued expenses                                                                                                                             |   | 18,330                   |    | 21,038                      |   |
| Purchase accounting restructuring accrual                                                                                                          |   | 4,328                    |    | 3,203                       |   |
| Deferred revenues                                                                                                                                  |   | 14,528                   |    | 16,379                      |   |
| Total current liabilities                                                                                                                          |   | 74,467                   |    | 76,783                      |   |
|                                                                                                                                               |   |                     |    |                        |   |
| Capital lease obligations                                                                                                                          |   | 102                      |    | 187                         |   |
| Purchase accounting restructuring accrual                                                                                                          |   | 6,678                    |    | 8,627                       |   |
| Deferred rent                                                                                                                                      |   | 447                      |    | 369                         |   |
| Long-term debt, excluding current  installments                                                                                                    |   | 1,405                    |    | —                      |   |
| Other non-current liabilities                                                                                                                      |   | 69                       |    | 356                         |   |
|                                                                                                                                               |   |                     |    |                        |   |
| Stockholders’ Equity:                                                                                                                         |   |                     |    |                        |   |
| Preferred stock, no par value, 15,000,000  shares authorized, none issued                                                                          |   | —                   |    | —                      |   |
| Common stock, no par value, 150,000,000  shares authorized, 43,288,902 and 43,013,428 shares issued; 41,066,202 and  40,790,728 shares outstanding |   | 103,577                  |    | 100,448                     |   |
| Retained earnings                                                                                                                                  |   | 103,600                  |    | 97,936                      |   |
| Deferred compensation                                                                                                                              |   | (70                      | )       | (56                         | )      |
| Accumulated other comprehensive loss                                                                                                               |   | (863                     | )       | (1,317                      | )      |
| Less treasury stock, at cost                                                                                                                       |   | (20,876                  | )       | (20,876                     | )      |
| Total stockholders’ equity                                                                                                                    |   | 185,368                  |    | 176,135                     |   |
|                                                                                                                                               |   | $                        | 268,536 |                        | $      | 262,457 |   |

 

The accompanyingnotes are an integral part of these statements.

 

4

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**DENDRITE INTERNATIONAL, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(IN THOUSANDS)**

**(UNAUDITED)**

 
|                                                                               |   | **For the  Three Months Ended March 31,** |   |
|------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|
|                                                                               |   | **2004**                                       |   | **2003** |   |
| Operating activities:                                                              |   |                                           |   |   |   |
| Net income                                                                         |   | $                                              | 5,664  |   | $ | 4,323 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                                           |   |   |   |
| Depreciation and amortization                                                      |   | 5,196                                          |   | 4,031 |   |
| Amortization of deferred compensation, net  of forfeitures                         |   | 109                                            |   | (50 | ) |
| Changes in assets and liabilities, net of  effects from acquisitions:              |   |                                           |   |   |   |
| Decrease in accounts receivable                                                    |   | 13,671                                         |   | 4,857 |   |
| Decrease in prepaid expenses and other                                             |   | 737                                            |   | 1,927 |   |
| Decrease (increase) in other non-current  assets                                   |   | 254                                            |   | (181 | ) |
| Decrease in accounts payable and accrued  expenses                                 |   | (4,027                                         | )      | (3,534 | ) |
| Decrease in purchase accounting  restructuring accrual                             |   | (2,615                                         | )      | (190 | ) |
| Decrease in income taxes payable                                                   |   | (1,007                                         | )      | (3,399 | ) |
| (Decrease) increase in deferred revenue                                            |   | (2,575                                         | )      | 681 |   |
| Increase in other non-current liabilities                                          |   | 114                                            |   | 27 |   |
|                                                                               |   |                                           |   |   |   |
| Net cash provided by operating activities                                          |   | 15,521                                         |   | 8,492 |   |
|                                                                               |   |                                           |   |   |   |
| Investing activities:                                                              |   |                                           |   |   |   |
| Sales of short-term investments                                                    |   | —                                         |   | 796 |   |
| Acquisitions, net of cash acquired                                                 |   | (1,990                                         | )      | — |   |
| Purchases of property and equipment                                                |   | (2,530                                         | )      | (2,545 | ) |
| Additions to capitalized software  development costs                               |   | (770                                           | )      | (664 | ) |
|                                                                               |   |                                           |   |   |   |
| Net cash used in investing activities                                              |   | (5,290                                         | )      | (2,413 | ) |
|                                                                               |   |                                           |   |   |   |
| Financing activities:                                                              |   |                                           |   |   |   |
| Repayments of long-term debt                                                       |   | (1,120                                         | )      | — |   |
| Repayments of acquired loan                                                        |   | (624                                           | )      | — |   |
| Payments on capital lease obligations                                              |   | (405                                           | )      | (125 | ) |
| Issuance of common stock                                                           |   | 2,514                                          |   | 1,266 |   |
|                                                                               |   |                                           |   |   |   |
| Net cash provided by financing activities                                          |   | 365                                            |   | 1,141 |   |
|                                                                               |   |                                           |   |   |   |
| Effect of foreign exchange rate changes on  cash                                   |   | 395                                            |   | 37 |   |
|                                                                               |   |                                           |   |   |   |
| Net increase in cash and cash equivalents                                          |   | 10,991                                         |   | 7,257 |   |
| Cash and cash equivalents, beginning of  year                                      |   | 30,405                                         |   | 68,308 |   |
|                                                                               |   |                                           |   |   |   |
| Cash and cash equivalents, end of period                                           |   | $                                              | 41,396 |   | $ | 75,565 |   |

 

The accompanyingnotes are an integral part of these statements.

 

5

----

 

**DENDRITE INTERNATIONAL, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT PER SHAREDATA)**

 

**1.  Basis of Presentation**

 

The consolidated financial statements of Dendrite International, Inc.and its subsidiaries (the “Company”) included in this Form 10-Q are unauditedand reflect all adjustments (consisting of normal recurring adjustments) whichare, in the opinion of management, necessary for a fair presentation of thefinancial position and operating results as of and for the three month periodsended March 31, 2004 and 2003.  Forfurther information, refer to the consolidated financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2003.

 

Our interim operating results may not be indicative of operatingresults for the full year.

 

**2.  Certain Significant Accounting Policies**

 

***Stock BasedCompensation ***TheCompany has adopted the disclosure requirements of Statement of FinancialAccounting Standards (“SFAS”) 123, “Accounting for Stock-Based Compensation,”as amended by SFAS 148, “Accounting for Stock-Based Compensation – Transitionand Disclosure.”  The Company appliesAccounting Principles Board (“APB”) 25, “Accounting for Stock Issued toEmployees” and related interpretations in accounting for stock options grantedunder the Company’s stock option plans (the “Plans”). Accordingly, compensationcost has been computed for the Plans based on the intrinsic value of the stockoption at the date of grant, which represents the difference between theexercise price and the fair value of the Company’s stock. As the exercise priceof substantially all stock options granted equaled the fair value of theCompany’s stock at the date of option issuance, no compensation cost related tostock options has been recorded in the accompanying statements of operations.Had compensation cost for the Plans and the employee stock purchase plan beendetermined consistent with SFAS 123, the Company’s net income and net incomeper share would have been adjusted to the following pro forma amounts:

 

|                                                                                                                                              |   | **For the  Three Months Ended  March 31,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                                                                                              |   | **2004**                                   |   | **2003** |   |
| Net income as reported                                                                                                                            |   | $                                          | 5,664  |   | $ | 4,323 |   |
|                                                                                                                                              |   |                                       |   |   |   |
| Add/(Deduct): Deferred compensation  amortization, net of forfeitures recognized in accordance with APB 25, net of  related tax effects           |   | 65                                         |   | (30 | ) |
|                                                                                                                                              |   |                                       |   |   |   |
| Deduct: Total stock-based employee  compensation expense determined under the fair value based method for all  awards, net of related tax effects |   | (3,801                                     | )      | (2,426 | ) |
|                                                                                                                                              |   |                                       |   |   |   |
| Pro forma net income                                                                                                                              |   | $                                          | 1,928  |   | $ | 1,867 |   |
|                                                                                                                                              |   |                                       |   |   |   |
| Earnings per share:                                                                                                                               |   |                                       |   |   |   |
| Basic - as reported                                                                                                                               |   | $                                          | 0.14   |   | $ | 0.11 |   |
| Basic - pro forma                                                                                                                                 |   | $                                          | 0.05   |   | $ | 0.05 |   |
|                                                                                                                                              |   |                                       |   |   |   |
| Diluted - as reported                                                                                                                             |   | $                                          | 0.13   |   | $ | 0.11 |   |
| Diluted - pro forma                                                                                                                               |   | $                                          | 0.05   |   | $ | 0.05 |   |

 

The fair value for these options were estimated at the date of grantusing a Black-Scholes option pricing model with the following assumptions:

 
|                                     |   | **For the  Three Months Ended March 31,** |   |
|------------------------------------------|--------|------------------------------------------------|--------|
|                                     |   | **2004**                                       |   | **2003** |   |
| Expected dividend yield                  |   | 0.0                                            | %      | 0.0 | % |
| Expected stock price volatility          |   | 70.0                                           | %      | 70.0 | % |
| Weighted-average risk-free interest rate |   | 1.0                                            | %      | 3.2 | % |
| Expected life of the option (years)      |   | 5.25                                           |   | 6.00 |   |

 

6

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**DENDRITE INTERNATIONAL, INC.**

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT PER SHAREDATA)**

 

The stock-based employee compensation expense determined under the fairvalue based methods for all awards, net of related tax effects, disclosedherein is determined based upon the number and fair value of options grantedand an estimate of forfeitures.  Theexpense is recognized over the vesting period of the options.  Under SFAS 123, compensation expense is notrecognized for options that are forfeited due to the employee’s failure tofulfill service requirements. Therefore, while the fair value per option is not recalculated, thenumber of options vesting would change, thus requiring recalculation of theaggregate compensation expense.  TheCompany accounts for forfeitures by estimating the total number of awards thatwill vest and adjusting that estimate if evidence becomes available that adifferent number of awards is expected to vest.

 

The Black-Scholes valuation model was developed for use in estimatingthe fair market value of traded options which have no vesting restrictions andare fully transferable.  In addition,option valuation models require the input of the highly subjective assumptionsdisclosed above.  Since the Company’semployee stock options have characteristics significantly different from thoseof traded options and changes in the subjective input assumptions canmaterially affect the fair market value estimate, in management’s opinion, theexisting models do not necessarily provide a reliable single measure of thefair value of its employee stock options.

 

***Guarantees***The Company provides certain indemnification provisions within itssoftware licensing agreements to protect its customers from any liabilities ordamages resulting from a claim of misappropriation or infringement by thirdparties relating to its software.  Theseprovisions continue in perpetuity, along with the Company’s software licensingagreements.  The Company has neverincurred a liability relating to one of these indemnification provisions in thepast and management believes that the likelihood of any future payout relatingto these provisions is unlikely. Therefore, the Company has not recorded a liability during any periodfor these indemnification provisions.

 

***Reclassifications***Certain prior periodbalances have been reclassified to conform to current period presentation.

 

**3.  Net Income Per Share**

 

The following table presents the computation of basic and diluted netincome per share for the three month periods ended March 31, 2004 and2003:

 

|                                       |   | **For the  Three Months Ended  March 31,** |   |
|--------------------------------------------|--------|-------------------------------------------------|--------|
|                                       |   | **2004**                                        |   | **2003** |   |
| Basic net income per share computation:    |   |                                            |   |   |   |
| Net income                                 |   | $                                               | 5,664  |   | $ | 4,323 |   |
| Weighted average common shares outstanding |   | 40,919                                          |   | 40,097 |   |
| Basic net income per share                 |   | $                                               | 0.14   |   | $ | 0.11 |   |
|                                       |   |                                            |   |   |   |
| Diluted net income per share computation:  |   |                                            |   |   |   |
| Net income                                 |   | $                                               | 5,664  |   | $ | 4,323 |   |
| Diluted common shares outstanding:         |   |                                            |   |   |   |
| Weighted average common shares outstanding |   | 40,919                                          |   | 40,097 |   |
| Impact of dilutive stock options           |   | 1,596                                           |   | 172 |   |
| Diluted common shares outstanding          |   | 42,515                                          |   | 40,269 |   |
| Diluted net income per share               |   | $                                               | 0.13   |   | $ | 0.11 |   |

 

**4.  Comprehensive Income**

 

The components of comprehensive income for the three month periodsended March 31, 2004 and 2003, consisted of the following:

 

7

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**DENDRITE INTERNATIONAL, INC.**

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT PER SHAREDATA)**

 

|                                     |   | **For the  Three Months Ended  March 31,** |   |
|------------------------------------------|--------|-------------------------------------------------|--------|
|                                     |   | **2004**                                        |   | **2003** |   |
| Net income                               |   | $                                               | 5,664  |   | $ | 4,323 |   |
| Other comprehensive income (losses):     |   |                                            |   |   |   |
| Foreign currency translation adjustments |   | 454                                             |   | (129 | ) |
| Comprehensive income                     |   | $                                               | 6,118  |   | $ | 4,194 |   |

 

**5. Acquisitions**

 

***Uto Brain***

 

On January 5, 2004, the Company completed its acquisition of UtoBrain Co., Ltd. (“Uto Brain”).  Based inOsaka, Japan, Uto Brain provided more than thirty pharmaceutical companies withdata, analytics, publishing and advisory services.  The combining of resources of Uto Brain with the existingresources of Dendrite creates a comprehensive information, software andservices company dedicated to the Japanese pharmaceutical industry and furtherenhances Dendrite’s ability to provide solutions to enhance sales, marketingand clinical functions of pharmaceutical companies in the Japanese market.  Uto Brain’s results of operations have beenincluded in the accompanying consolidated financial statements since the dateof acquisition.

 

The aggregate purchase price for Uto Brain was approximately $4,665(498,270 Yen) and approximately $73 of legal and professional fees wereincurred in connection with the transaction as well as the assumption ofapproximately $3,800 of bank debt and acquired loan.  As of March 31, 2004, the Company paid approximately $2,242of the purchase price with approximately $2,423 still outstanding and included withinaccrued other on the March 31, 2004 consolidated balance sheet.  The outstanding balance is payable asfollows: approximately $1,077 on September 30, 2004; $449 onJanuary 5, 2005; and $897 on March 31, 2005. The Company is in theprocess of finalizing a third-party valuation of certain intangible assets andtherefore the purchase price allocation remains preliminary and subject toadjustment.  The preliminary allocationof purchase price to intangible assets acquired in connection with the UtoBrain acquisition is as follows:

 

|                                            |   | **Weighted-Average  Estimated Useful  Life (Years)** |   | **Acquired  Intangible  Asset Value** |   |
|-------------------------------------------------|--------|------------------------------------------------------|--------|---------------------------------------|--------|
| Intangible Assets Subject to Amortization:      |   |                                                 |   |                                  |   |
| Customer Relationship Assets                    |   | 10                                                   |   | $                                     | 1,870  |   |
| Intangible Assets Not Subject to  Amortization: |   |                                                 |   |                                  |   |
| Goodwill                                        |   | N/A                                                  |   | 4,557                                 |   |
| Trademarks                                      |   | N/A                                                  |   | 148                                   |   |
|                                            |   |                                                 |   | $                                     | 6,575  |   |

 

***Synavant***

 

On June 16, 2003, we completed our acquisition of Synavant Inc.(“Synavant”). Synavant provided a broad range of knowledge-based services topharmaceutical and other life science companies around the world. Its comprehensiveglobal solutions included pharmaceutical CRM applications, interactivemarketing, server and database management, dedicated local help-line support,training, telemarketing, sample management and product recall services.Synavant was headquartered in Atlanta, Georgia, and had offices in 21countries. The combining of resources of Synavant with the existing resourcesof Dendrite creates a more comprehensive information, software and servicescompany dedicated to the global life sciences industry, and further enhancesDendrite’s ability to provide solutions to the sales, marketing and clinicalfunctions of pharmaceutical and other life science companies. Synavant’sresults of operations have been included in the accompanying consolidatedfinancial statements since the date of acquisition.

 

The aggregate purchase price was approximately $55,130, includingconsideration paid for the common stock and approximately $3,445 of legal andprofessional fees incurred in connection with the transaction.

 

The pro forma results of operations of the Company as if the Synavantacquisition had occurred as of January 1, 2003 are as follows:

 

8

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**DENDRITE INTERNATIONAL, INC.**

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT PER SHAREDATA)**

 

|                   |   | **Pro Forma  Results  for the Three  Months Ended  March 31, 2003 (A)** |   |
|------------------------|--------|------------------------------------------------------------------------------|--------|
| Revenues               |   | $                                                                            | 94,525 |   |
| Net loss               |   | $                                                                            | 720    |   |
| Basic loss per share   |   | $                                                                            | 0.02   |   |
| Diluted loss per share |   | $                                                                            | 0.02   |   |

 

----

(A)      Net loss includes approximately $500 ofhistorical restructuring charges from Synavant.

 

**6.  Purchase Accounting Restructuring Accrual**

 

In connection with the June 2003 acquisition of Synavant, theCompany restructured the combined operations by exiting certain former Synavantfacilities and eliminating certain former Synavant positions. During the firstquarter of 2004, the Company’s management increased its restructuring accrualby approximately $1,791 due to an adjustment of the total costs to exit certainformer Synavant facilities and recorded the corresponding adjustment togoodwill in the accompanying consolidated balance sheet. The Companyanticipates that the balance related to the termination of employees will bepaid during the current year and the remaining accrued restructuring balancerelated to the facility exit costs will be paid over the life of the leases,ending in February 2012. The Company’s management believes the accruedliability as of March 31, 2004 will be adequate to cover the costsincurred related to the restructuring.

 

The liability accrues for expenses to be incurred in exiting certainSynavant facilities, including assumptions related to sublease income whichoffsets future lease obligations. The underlying subleases are not in place forall facilities and the future placement of subleases, including the timing andterms and conditions of subleases, could be different than the assumptions.

 

The activity related to the Synavant and Software AssociatesInternational (“SAI”) purchase accounting restructuring accruals for the threemonth period ended March 31, 2004 is summarized in the table below:

 
|                              |   | **Purchase  Accounting  Restructuring  Accrual as of  December 31, 2003** |   | **2004  Year-to-Date  Adjustments** |   | **2004  Year-to-Date  Payments** |   | **Purchase  Accounting  Restructuring  Accrual as of March  31, 2004** |   |
|-----------------------------------|--------|--------------------------------------------------------------------------------|--------|-------------------------------------|--------|----------------------------------|--------|------------------------------------------------------------------------|--------|
| Synavant                          |   |                                                                           |   |                                |   |                             |   |                                                                   |   |
| Termination payments to employees |   | $                                                                              | 2,378  |                                | $      | —                           |   | $                                                                      | (1,304 | ) | $ | 1,074 |   |
| Facility exit costs               |   | 7,187                                                                          |   | 1,791                               |   | (913                             | )      | 8,065                                                                  |   |
| Total Synavant                    |   | 9,565                                                                          |   | 1,791                               |   | (2,217                           | )      | 9,139                                                                  |   |
|                              |   |                                                                           |   |                                |   |                             |   |                                                                   |   |
| SAI                               |   |                                                                           |   |                                |   |                             |   |                                                                   |   |
| Lease termination costs           |   | 2,265                                                                          |   | —                              |   | (398                             | )      | 1,867                                                                  |   |
| Total                             |   | $                                                                              | 11,830 |                                | $      | 1,791                            |   | $                                                                      | (2,615 | ) | $ | 11,006 |   |

 

**7.  Goodwill and Intangible Assets**

 

Effective July 1, 2001, the Company adopted SFAS 141,“Business Combinations,” and effective January 1, 2002, the Companyadopted SFAS 142, “Goodwill and other Intangible Assets.” SFAS 141requires business combinations initiated after June 30, 2001 to beaccounted for using the purchase method of accounting. It also specifies thetypes of acquired intangible assets that are required to be recognized andreported separately from goodwill. SFAS 142 requires that goodwill andcertain intangibles no longer be amortized, but instead be tested forimpairment at least annually. SFAS 142 also requires that intangible assetswith finite useful lives be amortized over their respective estimated usefullives and reviewed for impairment in accordance with SFAS 121, “Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed Of” which was superceded by SFAS 144 “Accounting for theImpairment or Disposal of Long-Lived Assets.” The Company conducts its annualimpairment testing of goodwill as of October 1 of each year. For thequarter ended March 31, 2004 no impairment was recorded.

 

The total gross carrying amount and accumulated amortization forgoodwill and intangible assets are as follows:

 

9

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**DENDRITE INTERNATIONAL, INC.**

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT PER SHARE DATA)**

 
|                                            |   | **As of  March 31, 2004** |    | **As of  December 31, 2003** |   |
|-------------------------------------------------|--------|--------------------------------|---------|-----------------------------------|--------|
|                                            |   | **Gross**                      |    | **Accumulated  Amortization**     |   | **Net** |   | **Gross** |   | **Accumulated  Amortization** |   | **Net** |   |
| Intangible Assets Subject To Amortization:      |   |                           |    |                              |   |   |   |   |   |   |   |   |   |
| Purchased capitalized software                  |   | $                              | 2,441   |                              | $      | 928 |   | $ | 1,513 |   | $ | 2,441 |   | $ | 775 |   | $ | 1,666 |   |
| Capitalized software development costs          |   | 21,491                         |    | 15,251                            |   | 6,240 |   | 20,721 |   | 14,595 |   | 6,126 |   |
| Customer relationship assets                    |   | 8,863                          |    | 1,209                             |   | 7,654 |   | 6,993 |   | 904 |   | 6,089 |   |
| Backlog                                         |   | 2,400                          |    | 1,927                             |   | 473 |   | 2,400 |   | 1,798 |   | 602 |   |
| Non-compete covenants                           |   | 3,709                          |    | 1,543                             |   | 2,166 |   | 3,730 |   | 1,170 |   | 2,560 |   |
| Purchased database                              |   | 2,600                          |    | 205                               |   | 2,395 |   | 2,600 |   | 140 |   | 2,460 |   |
| Other intangibles                               |   | 177                            |    | 73                                |   | 104 |   | 177 |   | 46 |   | 131 |   |
| Total                                           |   | 41,681                         |    | 21,136                            |   | 20,545 |   | 39,062 |   | 19,428 |   | 19,634 |   |
|                                            |   |                           |    |                              |   |   |   |   |   |   |   |   |   |
| Intangible Assets Not Subject to  Amortization: |   |                           |    |                              |   |   |   |   |   |   |   |   |   |
| Goodwill                                        |   | 76,666                         |    | —                            |   | 76,666 |   | 70,403 |   | — |   | 70,403 |   |
| Trademarks                                      |   | 6,880                          |    | —                            |   | 6,880 |   | 6,732 |   | — |   | 6,732 |   |
| Total                                           |   | 83,546                         |    | —                            |   | 83,546 |   | 77,135 |   | — |   | 77,135 |   |
|                                            |   |                           |    |                              |   |   |   |   |   |   |   |   |   |
| Total Goodwill and Intangible Assets            |   | $                              | 125,227 |                              | $      | 21,136 |   | $ | 104,091 |   | $ | 116,197 |   | $ | 19,428 |   | $ | 96,769 |   |

 

Thechanges in the carrying amount of goodwill for the period ended March 31,2004 are as follow:

 

|     |   | **Balance as  of  December 31, 2003** |   | **Adjustments** |   | **Balance as  of  March 31, 2004** |   |
|----------|--------|--------------------------------------------|--------|-----------------|--------|-----------------------------------------|--------|
| Goodwill |   | $                                          | 70,403 |            | $      | 6,263                                   |   | $ | 76,666 |   |
|          |        |                                            |        |                 |        |                                         |        |  |  |  |

 

Aggregate annual amortization expense ofintangible assets is estimated to be:

 
| **Year Ending December 31,** |   |   |   |
|-----------------------------------|--------|--------|--------|
| 2004                              |   | $      | 7,287  |   |
| 2005                              |   | 4,278  |   |
| 2006                              |   | 2,755  |   |
| 2007                              |   | 889    |   |
| 2008                              |   | 882    |   |
| Thereafter                        |   | 5,413  |   |
|                              |   | $      | 21,504 |   |

 

**8.Line-of-Credit**

 

The Company entered into a credit agreement (the “Agreement”) as ofJune 16, 2003, in the amount of $30,000 with JPMorgan Chase Bank thatexpires on July 1, 2005. The Agreement replaced the Company’s thenexisting $15,000 credit facility. The Agreement is available to finance workingcapital needs and possible future acquisitions. Among other covenants, theAgreement requires the Company to maintain a minimum consolidated net worth,measured quarterly, which is equal to $130,000, plus 50% of net income earnedafter April 1, 2003 and 75% of the net proceeds of any offering of newequity interests issued subsequent to June 30, 2003. As of March 31,2004, our consolidated net worth was $185,368. The Agreement contains certainrestrictions on our ability to create or assume liens, dispose of assets,consolidate or merge, extend credit, incur other indebtedness or pay cashdividends. As of March 31, 2004, the Company was in compliance with all covenants.  As of March 31, 2004, the Company didnot have any amounts outstanding under the line of credit.

 

As of March 31, 2004 and 2003, the Company had letters of creditof approximately $921 and $475 outstanding, respectively.

 

**9.Long-Term Debt**

 

In connection with the Uto Brain acquisition, the Company assumed bankdebt of approximately $3,155, with a weighted-average interest rate of 2.10%,and acquired a loan of approximately $627 with an interest rate of 1.80%.  As of March 31, 2004, $2,239 of thebank debt related to this transaction was outstanding.  The acquired loan balance was paid in fullduring the quarter ended March 31, 2004.

 

10

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**DENDRITE INTERNATIONAL, INC.**

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**($ IN THOUSANDS, EXCEPT PER SHAREDATA)**

 

As of March 31, 2004,future payments related to the acquired bank debt are as follows:

 
| **Year Ending December 31,** |   |   |   |
|-----------------------------------|--------|--------|--------|
| 2004                              |   | $      | 749    |   |
| 2005                              |   | 440    |   |
| 2006                              |   | 321    |   |
| 2007                              |   | 262    |   |
| 2008                              |   | 93     |   |
| Thereafter                        |   | 374    |   |
|                              |   | $      | 2,239  |   |

 

**10. Customer and Geographic Segment Data**

 

For the three months ended March 31,2004 and 2003, the Company derived approximately 27% and 45% of its revenuesfrom its largest customer, respectively.

 

The Company is organized by geographic locations and has one reportablesegment. All transfers between geographic areas have been eliminated fromconsolidated revenues. Operating income consists of total revenues recorded inthe location less operating expenses and does not include interest income,other expense or income tax expense. This data is presented in accordance withSFAS 131, “Disclosure About Segments of an Enterprise and Related Information.”

 

|                 |   | **For the  Three Months Ended  March 31,** |    |
|----------------------|--------|-------------------------------------------------|---------|
|                 |   | **2004**                                        |    | **2003** |   |
| Revenues:            |   |                                            |    |   |   |
| United States        |   | $                                               | 62,466  |   | $ | 48,608 |   |
| All other            |   | 32,598                                          |    | 11,102 |   |
|                 |   | $                                               | 95,064  |   | $ | 59,710 |   |
| Operating income:    |   |                                            |    |   |   |
| United States        |   | $                                               | 6,214   |   | $ | 4,948 |   |
| All other            |   | 3,176                                           |    | 2,005 |   |
|                 |   | $                                               | 9,390   |   | $ | 6,953 |   |
|                 |   |                                            |    |   |   |
|                 |   | **As of  March  31, 2004**                      |    | **As of  December 31,  2003** | ** ** |
| Identifiable assets: |   |                                            |    |   |   |
| United States        |   | $                                               | 213,609 |   | $ | 218,992 |   |
| All other            |   | 54,927                                          |    | 43,465 |   |
|                 |   | $                                               | 268,536 |   | $ | 262,457 |   |

 

**11. ****Subsequent Events**

 

On April 6, 2004, the Company completed the strategic acquisitionof Medical Data Management (“MDM”) for approximately $8,000, includingapproximately $3,000 in restricted stock. Primarily based in Warsaw, Poland, the MDM group of companies is aleading provider of physician databases, market research and sales forcesupport services to pharmaceutical companies in Poland, Hungary, Russia and theUkraine.

 

The Company entered into an agreement, dated April 6, 2004, tosell its facility in Piscataway, New Jersey. The agreement is subject to termination by the purchaser during a duediligence period which has not yet expired as well as certain other statedclosing conditions.

 

11

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**ITEM 2.  Management’s Discussion and Analysis of Financial Condition andResults of Operations.**

**($IN THOUSANDS)**

 

**FORWARD-LOOKINGSTATEMENTS**

 

This Form 10-Q may contain certain forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933 andSection 21-E of the Securities Exchange Act of 1934, which are intended tobe covered by the safe harbors created by such acts. For this purpose, anystatements that are not statements of historical fact may be deemed to beforward-looking statements, including the statements under “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”regarding our strategy, future operations, future expectations and futureestimates, future financial position or results and future plans and objectivesof management. Those statements in this Form 10-Q containing the words“believes,” “anticipates,” “plans,” “expects” and similar expressionsconstitute forward-looking statements, although not all forward-lookingstatements contain such identifying words. These forward-looking statements arebased on our current expectations, assumptions, estimates and projections aboutour Company and the pharmaceutical and consumer packaged goods industries. Allsuch forward-looking statements involve significant risks and uncertainties,including those risks identified in this Form 10-Q under “Factors That MayAffect Future Results,” many of which are beyond our control. Although webelieve that the assumptions underlying our forward-looking statements arereasonable, any of the assumptions could be inaccurate and actual results maydiffer materially from those indicated by the forward-looking statementsincluded in this Form 10-Q, as more fully described under “Factors That MayAffect Future Results.” In light of the significant uncertainties inherent inthe forward-looking statements included in this Form 10-Q, you should notconsider the inclusion of such information as a representation by us or anyoneelse that we will achieve such results. Moreover, we assume no obligation toupdate these forward-looking statements to reflect actual results or changes inassumptions, expectations or projections. In addition, our financial andperformance outlook concerning future revenues, margins, earnings, earnings pershare and other operating or performance results does not include the impact ofany future acquisitions, future acquisition-related expenses or any futurerestructuring or other charges that may occur from time-to-time due tomanagement decisions and changing business circumstances and conditions.

 

**EXECUTIVEOVERVIEW**

 

We provide a broad array of solutions worldwide that enablepharmaceutical and other life science companies to strategically optimize theirsales, marketing and clinical resources. Our strategy is to continue todiversify and expand our solutions portfolio, customer base and geographicreach by leveraging our extensive knowledge and deep relationships with thepharmaceutical and life sciences industries and capitalizing upon our deeprelationships in these industries. We have and will continue to rely on bothinternal growth and acquisitions to meet to our growth objectives.

 

 Our acquisition of SynavantInc. (“Synavant”) in 2003 diversified and expanded our solutions portfolio,particularly as it relates to the pharmaceutical marketing channel, by addinginteractive marketing services in the U.S. and abroad, as well as new data andservices solutions in Europe. In January 2004, we further broadened andenhanced our product and service portfolio in the Japanese pharmaceuticalindustry as well as extended our leadership position in Japan with ouracquisition of Uto Brain Co. Ltd. (“Uto Brain”). Additionally, inApril 2004, subsequent to the close of the first quarter, we acquiredMedical Data Management, increasing our ability to provide leading solutionsthat drive promotional and sales effectiveness in Central and Eastern Europe.  We believe these acquisitions complement ourcurrent business operations by enhancing our solutions portfolio and increasingour access into new customers and markets.

 

We have increased both our solutions and customer base and believe thatthis combination presents significant opportunity for future growth.  We have also committed to investing in keyinitiatives to help drive future growth. We believe increased investments in marketing and sales resources andprograms will help us more effectively sell and market the diversity ofsolutions we now offer.  Our futuregrowth is dependent on our ability to further penetrate the markets in which weoperate and increase the adoption rate of our expanded portfolio of solutions.

 

We evaluate our performance based upon a number of operating metrics.Chief among these are revenues, services gross margin percent, operatingmargins, earnings per diluted share, operating cash flow and days salesoutstanding. In the first quarter of 2004, we saw the execution of our strategyyield growth in revenues, operating margin and earnings per share. We alsocontinued to exhibit strong cash generation attributes, improving days salesoutstanding from the prior year and generating strong positive operating cashflow even as we continued to pay off some of the remaining liabilitiesassociated with our acquisitions.

 

**CRITICALACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES**

 

There have been no material changes to our critical accountingpolicies, judgments and estimates from the information provided in Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations included in our annual report on form 10-K for the year endedDecember 31, 2003.

 

12

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**ITEM2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

**($IN THOUSANDS)**

 

**MERGERSAND ACQUISITIONS**

 

We regularly evaluate opportunities to acquire products or businessesthat represent strategic enhancements to our operations. Such acquisitionopportunities, if they arise, may involve the use of cash or equityinstruments.

 

**Uto Brain Co., Ltd.**

On January 5, 2004, the Company completed the acquisition of UtoBrain.  Based in Osaka, Japan, Uto Brainprovided more than thirty pharmaceutical companies with data, analytics,publishing and advisory services.  Thecombining of resources of Uto Brain with the existing resources of Dendritecreates a comprehensive information, software and services company dedicated tothe Japanese pharmaceutical industry and further enhances Dendrite’s ability toprovide solutions to enhance sales, marketing and clinical functions ofpharmaceutical companies in the Japanese market.  Uto Brain’s results of operations have been included in theaccompanying consolidated financial statements since the date of acquisition.

 

The aggregate purchase price for Uto Brain was approximately $4,665(498,270 Yen) and approximately $73 of legal and professional fees wereincurred in connection with the transaction as well as the assumption ofapproximately $3,800 of bank debt and acquired loan.  As of March 31, 2004, the Company paid approximately $2,242of the purchase price with approximately $2,423 still outstanding and includedwithin accrued other on the March 31, 2004 consolidated balancesheet.  The outstanding balance ispayable as follows: approximately $1,077 on September 30, 2004; $449 onJanuary 5, 2005; and $897 on March 31, 2005. The Company is in theprocess of finalizing a third-party valuation of certain intangible assets andtherefore the purchase price allocation remains preliminary and subject toadjustment.

 

**Synavant Inc.**

On June 16, 2003, we completed our acquisition of Synavant.Synavant provided a broad range of knowledge-based services to pharmaceuticaland other life science companies around the world. Its comprehensive globalsolutions included pharmaceutical CRM applications, interactive marketing,server and database management, dedicated local help-line support, training,telemarketing, sample management and product recall services. Synavant washeadquartered in Atlanta, Georgia, and had offices in 21 countries. We believethat combining Synavant’s resources with the existing resources of Dendritecreates a more comprehensive information, software and services companydedicated to the global life sciences industry, and further enhances ourability to provide market leading solutions to the sales, marketing andclinical functions of pharmaceutical and other life science companies.Synavant’s results of operations have been included in the accompanyingconsolidated financial statements since the date of acquisition.

 

The aggregate purchase price for Synavant was approximately $55,130,including consideration paid for the common stock and approximately $3,445 oflegal and professional fees incurred in connection with the transaction.

 

In connection with the June 2003 acquisition of Synavant, theCompany restructured the combined operations by exiting certain former Synavantfacilities and eliminating certain former Synavant positions.  During the first quarter of 2004, theCompany’s management increased its restructuring accrual estimate byapproximately $1,791 due to an adjustment of the total costs to exit certainformer Synavant facilities and recorded the corresponding adjustment togoodwill in the accompanying consolidated balance sheet. The Company’smanagement believes the accrued liability as of March 31, 2004 will beadequate to cover the costs incurred related to the restructuring.

 

The liability accrues for expenses incurred in exiting certain Synavantfacilities, including assumptions related to sublease income which offsetsfuture lease obligations. The underlying subleases are not in place for allfacilities and the future placement of subleases, including the timing andterms and conditions of subleases, could be different than the assumptions andimpact future results of operations.

 

**RESULTS OFOPERATIONS**

 

**THREE MONTHS ENDED MARCH 31,2004 AND 2003**

 

***REVENUES.***Total revenues increased to$95,064 for the three months ended March 31, 2004, up $35,354, or 59%,from $59,710 for the three months ended March 31, 2003.  The primary driver of the increase was theJune 2003 Synavant acquisition.

 

License fee revenues increased to $3,346 for the three months endedMarch 31, 2004, up $784, or 31%, from $2,562 for the three months endedMarch 31, 2003. This increase is primarily related to a large sale oflicenses to a client in Japan and from sales to clients, of former Synavantcompanies, that expanded their European sales forces.  License fees are, by nature, non-recurring items and fluctuatefrom period-to-period.

 

Service revenues increased to $91,718 for the three months endedMarch 31, 2004, up $34,570, or 60%, from $57,148 for the three monthsended March 31, 2003. This increase was primarily driven by theJune 2003 acquisition of Synavant. Including the acquired revenue, the Company experienced growth ofapproximately 9% in domestic technical services, 39% in domestic sales 

 

13

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**ITEM2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

**($IN THOUSANDS)**

 

support servicesand 47% in low gross margin and pass-through postage services.  In addition, our domestic data andconsulting business as well as our international services increased more than150% versus the comparable prior year period.

 

***COST OF REVENUES.***Total cost ofrevenues increased to $50,025 for the three months ended March 31, 2004,an increase of $20,205, or 68%, from $29,820 for the three months endedMarch 31, 2003. The primary driver of the increase in cost of revenues wasattributable to the acquisition of Synavant.

 

Cost of license fees decreased to $989 for the three months endedMarch 31, 2004, down $90, or 8%, from $1,079 for the three months endedMarch 31, 2003. Cost of license fees for the three months endedMarch 31, 2004 is comprised of the amortization of capitalized softwaredevelopment costs and purchased software costs of $656 and $153, respectively,and third-party vendor license fees of $180. Cost of license fees for thecomparable period in 2003 is comprised of the amortization of capitalizedsoftware development costs and purchased software costs of $686 and $153,respectively, and third-party vendor license fees of $240.

 

Cost of services increased to $49,036 for the three months endedMarch 31, 2004, up $20,295, or 71%, from $28,741 for the three monthsended March 31, 2003. The increase in cost of services is primarily aresult of the additional costs due to the increase in headcount and associatedcosts from the Synavant and Uto Brain acquisitions, as well as an increase inpass-through postage costs of approximately $4,500 and start-up costs relatedto our off-shore outsourcing initiative.

 

***GROSS MARGIN.***Total gross margin forthe three months ended March 31, 2004 and 2003 was 47% and 50%,respectively.

 

Gross margin for license fees was 70% for the three months endedMarch 31, 2004, up from 58% for the three months ended March 31, 2003.The increase in gross margin was primarily attributable to the 31% increase inlicense fee revenues, including increased international sales, which generallycontain less third-party imbedded software costs, over a relatively constantcost basis.

 

Gross margin for services was 47% and 50% for the three month periodsended March 31, 2004 and 2003, respectively. This decrease in gross marginfor services is attributable to the inclusion of certain Synavant lower marginbusiness, including approximately $4,500 of pass-through postage as well as thestart-up costs of our off-shore outsourcing initiative.

 

***SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES.***SG&A expenses increased to $32,966 for the three months endedMarch 31, 2004, up $12,727, or 63%, from $20,239 for the three monthsended March 31, 2003. This increase reflects the additional operatingcosts and amortization expense related to the Synavant and Uto Brainacquisitions. As a percentage of revenues, SG&A increased to 35% for the threemonths ended March 31, 2004, up from 34% for the three months ended March31, 2003.  The Company has and willcontinue to invest in sales and marketing initiatives in order to drive itstop-line growth while continuing to focus on cost containment measures.

 

***RESEARCH AND DEVELOPMENT (R&D) EXPENSES.***R&D expenses increased to $3,022 for the three months ended March 31,2004, up $324, or 12%, from $2,698 for the three months ended March 31,2003. As a percentage of revenues, R&D expenses decreased to 3% for thethree months ended March 31, 2004 from 5% for the three months endedMarch 31, 2003 due primarily to the significant increase in revenues.

 

***OTHER OPERATING (INCOME).*** The Companyreceived proceeds from an insurance claim of $339 during the quarter endedMarch 31, 2004.

 

***PROVISION FOR INCOME TAXES.***The annualestimated effective income tax expense rate for the three month periods endedMarch 31, 2004 and 2003 was approximately 40%.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

At March 31, 2004, working capital was approximately $53,467compared to $49,232 as of December 31, 2003. Cash and investments were$41,396 as of March 31, 2004, compared to $30,405 as of December 31,2003. This increase was primarily attributable to the cash generated byoperating activities partially offset by payments made in connection with theSynavant and Uto Brain acquisitions.

 

We finance our business primarily through cash generated by operations.Net cash provided by operating activities was $15,521 and $8,492 for theperiods ended March 31, 2004 and 2003, respectively.  Our accounts receivable days salesoutstanding decreased from 68 days for the quarter ended December 31, 2003to 59 days for the quarter ended March 31, 2004 partially due to thereceipt of approximately $3,300 of a long term contracted receivable.  We also generated operating cash from ourconsiderable growth in net income adjusted for changes in assets andliabilities, net of effects from acquisitions. These increases in operating cash flow were partially offset by $2,615of payments related to accrued purchase accounting charges incurred inconnection the Synavant acquisition as well as increased payments of accountspayable and accrued expenses.

 

Cash used in investing activities was $5,290 for the three months endedMarch 31, 2004, compared to $2,413 for the three months endedMarch 31, 2003. The increase of $2,877 was primarily attributable to thecash used in connection with the Uto Brain 

 

14

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**ITEM2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

**($IN THOUSANDS)**

 

acquisition. Thisincrease was partially offset by a decrease in sales of short-term investmentsduring the three months ended March 31, 2004, compared to thecorresponding prior year period.

 

Although purchases of property and equipment were flat for the quarterended March 31, 2004 versus the comparable prior year period, the Companyanticipates an increase in its capital expenditures for 2004. The increase isprimarily due to the capital requirements of the new corporate headquarters andthe need to adjust going-forward capital requirements for a larger combinedCompany reflecting the acquisition of Synavant. The Company currently expectsthat it will incur approximately $8,000 of capital expenditures in connectionwith the headquarters relocation. In addition, the Company also expects capitalspending in the range of approximately $8,000 to $12,000 to support theinfrastructure associated with a full year of combined Dendrite and Synavantoperations. We review our capital expenditure program periodically and adjustit as required to meet current needs. The foregoing amounts are based oncurrent assumptions and are subject to change during the course of 2004.

 

Cash provided by financing activities was $365 for the three monthsended March 31, 2004, compared to $1,141 for the three months endedMarch 31, 2003. The decrease of $776 was primarily attributable torepayments of long-term debt and acquired loans in connection with the UtoBrain acquisition offset, in part, by an increase in stock option exercisesduring the three months ended March 31, 2004.

 

The Company regularly evaluates opportunities to acquire products orbusinesses complementary to our operations. Such acquisition opportunities, ifthey arise and are successfully completed, may involve the use of cash orequity instruments. The Company believes that available funds, anticipated cashflows from operations and the availability of our revolving line of credit willsatisfy our current projected working capital and capital expenditurerequirements, exclusive of cash required for possible future acquisitions ofbusinesses, products and technologies, during the next twelve to eighteenmonths. There can be no assurance, however, that our business will continue togenerate cash flow at current levels or that anticipated operationalimprovements will be achieved. Our ability to generate future cash flowsdepends on our future performance and financial results, which, to a certainextent, are subject to general conditions in or effecting the pharmaceuticalindustry and to general economic, political, financial, competitive,legislative and regulatory factors beyond our control.

 

**ContractualObligations and Commitments**

 

The Company entered into a credit agreement (the “Agreement”) as ofJune 16, 2003, in the amount of $30,000 with JPMorgan Chase Bank thatexpires on July 1, 2005. The Agreement replaced the Company’s thenexisting $15,000 credit facility. The Agreement is available to finance workingcapital needs and possible future acquisitions. Among other covenants, theagreement requires the Company to maintain a minimum consolidated net worth,measured quarterly, which is equal to $130,000, plus 50% of net income earnedafter April 1, 2003 and 75% of the net proceeds of any offering of newequity interests issued subsequent to June 30, 2003. As of March 31,2004, our consolidated net worth was $185,368. The Agreement contains certainrestrictions on our ability to create or assume liens, dispose of assets,consolidate or merge, extend credit, incur other indebtedness or pay cashdividends. As of March 31, 2004, there were no borrowings outstandingunder the Agreement and the Company was in compliance with all covenants.

 

In connection with the Uto Brain acquisition, the Company assumed bankdebt of approximately $3,155, with a weighted-average interest rate of 2.10%and acquired a loan of approximately $627, with an interest rate of 1.80%.  As of March 31, 2004, $2,239 of the bankdebt related to this transaction was outstanding.  The acquired loan balance was paid in full during the quarterended March 31, 2004.

 

Our principal commitments at March 31, 2004 consisted primarily ofobligations under operating and capital leases as well as future minimumguarantees to certain vendors. Future minimum payments on these obligations areas follows:

 
|                        |   | **Payments  Due by Period** |    |
|-----------------------------|--------|-----------------------------|---------|
| **Contractual Obligations** |   | **Total**                   |    | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **2008** |   | **Thereafter** |   |
| Capital leases              |   | $                           | 824     |   | $ | 629 |   | $ | 195 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Minimum guarantees          |   | 441                         |    | 441 |   | — |   | — |   | — |   | — |   | — |   |
| Uto Brain purchase price    |   | 2,423                       |    | 1,077 |   | 1,346 |   | — |   | — |   | — |   | — |   |
| Long-term debt              |   | 2,239                       |    | 749 |   | 440 |   | 321 |   | 262 |   | 93 |   | 374 |   |
| Operating leases (1)        |   | 104,335                     |    | 11,827 |   | 14,995 |   | 12,644 |   | 11,595 |   | 9,413 |   | 43,861 |   |
| Total                       |   | $                           | 110,262 |   | $ | 14,723 |   | $ | 16,976 |   | $ | 12,965 |   | $ | 11,857 |   | $ | 9,506 |   | $ | 44,235 |   |

 

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(1) Operating lease amounts disclosed above include $16,458 of futureoperating lease costs, excluding estimated future sublease income, accrued forin the purchase accounting restructuring accruals related to the Synavant andSAI acquisitions.

 

15

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**ITEM2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

**($IN THOUSANDS)**

 

In addition to the contractual obligations disclosed above, the Companyis currently in negotiations with several vendors for net capital expendituresof approximately $8,000 in connection with the headquarters relocation.

 

As ofMarch 31, 2004, letters of credit for approximately $921 were outstandingrelated to deposits on certain facilities.

 

TheCompany has an agreement with a venture capital fund with a commitment tocontribute $1,000 to the fund, callable at the discretion of the generalpartner in $100 increments. As of March 31, 2004, $600 of the commitmentremains. The agreement has a termination date of December 11, 2010,subject to extension with the consent of a majority in interest of the limitedpartners. This asset is recorded within Other Assets in the March 31, 2004and December 31, 2003 consolidated balance sheets.

 

### **FACTORS THAT MAYAFFECT FUTURE RESULTS**

 

Set forth in this Quarterly Report on Form 10-Q are certain risks anduncertainties that could cause our actual results to differ materially from theforward-looking statements contained in this Quarterly Report on Form 10-Q. Youare strongly urged to carefully consider the cautionary language and risks setforth below.

 

**WE DEPEND ON A FEW MAJOR CUSTOMERS FOR A SIGNIFICANT PORTIONOF OUR REVENUES**

 

Historically, a limited number of our customers have contributed asignificant percentage of our revenues. We anticipate that our operatingresults in any given period will continue to depend significantly upon revenuesfrom a small number of customers. The loss of any of these customers (whichcould include loss through mergers and acquisitions) could have a materiallyadverse effect on our business, operating results or financial condition. Wecannot make any assurances that we will retain our existing customers orattract new customers that would replace the revenue that could be lost if oneor more of these customers failed to renew its agreement(s) with us.

 

**OUR BUSINESS IS HEAVILY DEPENDENT ON THE PHARMACEUTICALINDUSTRY**

 

Many of our solutions are currently used in connection with themarketing and sale of prescription-only drugs. This market is undergoing anumber of significant changes. These include:

 

• the significant and continuing consolidation of thepharmaceutical industry which may reduce the number of our existing andpotential customers;

• regulatory changes that permit the over-the-countersale of formerly prescription-only drugs;

• increasing Food and Drug Administration activism; and

• competitive pressure on the pharmaceutical industryresulting from the continuing shift to delivery of healthcare through managedcare organizations.

 

We cannot assure you that we can respond effectively to any or all ofthese and other changes in the marketplace. Our failure to do so could have amaterial adverse effect on our business, operating results or financialcondition, as our business depends, in large part, on the business conditionswithin this marketplace.

 

**OUR CUSTOMERS MAY NOT SUCCESSFULLY IMPLEMENT OUR PRODUCTS**

 

Our customers often implement our products in stages and our productsare often utilized by a large number of our customers’ personnel. In the eventthat our customers have difficulties implementing our products and services orare not fully satisfied with our products and services, our business, operatingresults and financial condition could be materially and adversely affected.

 

**WE FACE RISKS ASSOCIATED WITH OUR ACQUISITIONS**

 

Our business may be materially and adversely affected as a result ofthe significant risks associated with our acquisitions, including our recentacquisitions of Synavant, SAI, Uto Brain and the MDM group of companies. Aspart of our business strategy, we have acquired, and in the future may acquire,businesses that offer complementary products, services or technologies. Theseacquisitions are accompanied by substantial risks, including:

 

• unexpected problems,liabilities, risks or costs associated with the acquired business;

• the effect of theacquisitions on our financial and strategic position;

• our inability to successfullyintegrate the acquired business;

• the failure of an acquiredbusiness to further our strategies;

• our inability to achieve theexpected cost and business synergies;

 

16

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**ITEM2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

**($IN THOUSANDS)**

 

• the significant strain on ouroperating systems;

• the diversion of ourmanagement’s attention from other business concerns;

• the impairment or loss ofrelationships with customers of the acquired business;

• the negative impact of thecombination of different corporate cultures;

• the loss of key employees ofthe acquired company; and

• the maintenance of uniform,company-wide standards, procedures and policies.

 

Any of these factors could have a material adverse effect on ourrevenues and earnings. We expect that the consideration paid for futureacquisitions, if any, could be in the form of cash, stock, rights to purchasestock, or a combination of these. To the extent that we issue shares of stockor other rights to purchase stock in connection with any future acquisition,existing shareholders will experience dilution and potentially decreasedearnings per share.

 

While to date we have had success integrating acquired entities intoour operations, we can not guarantee that we will successfully integrate thesenew businesses into our operations or achieve all of the expected costsynergies.

 

We may in the future acquire additional complementary companies,products or technologies. If we do so, we may face the same risks,uncertainties and disruptions discussed above. In addition, our profitabilitymay suffer because of acquisition-related costs or amortization costs foracquired intangible assets.

 

**BUSINESS AND ECONOMIC PRESSURES ON OUR MAJOR CUSTOMERS MAYCAUSE A DECREASE IN DEMAND FOR OUR NEW PRODUCTS AND SERVICES**

 

Business and economic pressures on our major customers may result inbudget constraints that directly impact their ability to purchase the Company’snew products and services offerings. We cannot assure you that any decrease indemand caused by these pressures will not have a material adverse effect on ourbusiness, operating results or financial condition.

 

**OUR LENGTHY SALES AND IMPLEMENTATION CYCLES MAKE IT DIFFICULTTO PREDICT OUR QUARTERLY REVENUES**

 

The selection of a CRM or SFA solution generally entails an extendeddecision-making process by our customers because of the strategic implications,substantial costs and significant commitment of resources associated with acustomer’s license or implementation of the solution. Given the importance ofthe decision, senior levels of management of our customers are often involvedin the process and, in some instances, their board of directors may also beinvolved. As a result, the lengthy decision-making process typically takes nineto eighteen months, and in certain cases longer. Accordingly, we cannot fullycontrol or predict the timing of our execution of contracts with customers.Prior sales and implementation cycles should not be relied upon as anyindication of future cycles.

 

In addition, an implementation process of three to six or more monthsbefore the software is rolled out to a customer’s sales force is customary.However, if a customer were to delay or extend its implementation process, ourquarterly revenues may decline below expected levels and could adversely affectour results of operations.

 

**OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE**

 

Our total revenue and operating results may vary significantly fromquarter to quarter. The main factors that could cause these fluctuations are:

 

• the discretionary nature ofour customers’ purchase and budget cycles;

• potential delays inrecognizing revenue from license transactions;

• seasonal variations inoperating results; and

• variations in the fiscal orquarterly cycles of our customers.

 

In addition, we establish our expenditure levels for productdevelopment, sales and marketing and some of our other operating expenses basedin large part on our expected future revenues and anticipated competitiveconditions. In particular, we frequently add staff in advance of new businessto permit adequate time for training. If the new business is subsequentlydelayed, canceled or not awarded, we will have incurred expenses without theassociated revenues. We also may increase sales and marketing expenses ifcompetitive pressures become greater than originally anticipated. Since only asmall portion of our expenses varies directly with our actual revenues, ouroperating results and profitability are likely to be adversely anddisproportionately affected if our revenues fall below our targeted goals orexpectations.

 

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**ITEM2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

**($IN THOUSANDS)**

 

As a result of these and other factors, revenues for any quarter may besubject to fluctuation. You should not rely on our period-to-period comparisonsof our results of operations as indications of future performance. Our futurequarterly results may from time to time not meet the expectations of marketanalysts or investors, which could have a materially adverse effect on theprice of our common stock.

 

**WE MAY BE UNABLE TO SUCCESSFULLY INTRODUCE NEW PRODUCTS ORRESPOND TO TECHNOLOGICAL CHANGE**

 

The market for CRM and SFA products changes rapidly because of frequentimprovements in computer hardware and software technology. Our future successwill depend, in part, on our ability to:

 

• use available technologies and data sources to developnew products and services and to enhance our current products and services;

• introduce new solutions that keep pace withdevelopments in our target markets; and

• address the changing and increasingly sophisticatedneeds of our customers.

 

We cannot assure you that we will successfully develop and market newproducts or product enhancements that respond to technological advances in themarketplace, or that we will do so in a timely fashion. We also cannot assureyou that our products will adequately and competitively address the needs ofthe changing marketplace.

 

Competition for software products has been characterized by shorteningproduct cycles. We may be materially and adversely affected by this trend ifthe product cycles for our products prove to be shorter than we anticipate. Ifthat happens, our business, operating results or financial condition could beadversely affected.

 

To remain competitive, we also may have to spend more of our revenueson product research and development than we have in the past. As a result, ourresults of operations could be materially and adversely affected.

 

**SOFTWARE ERRORS OR DEFECTS COULD AFFECT OUR REVENUES**

 

Our software products are technologically complex and may containpreviously undetected errors or failures or errors when products are firstintroduced or when updated versions are released. We cannot assure you that,despite our testing, our new products will be free from significant errors.Software errors could cause delays in the commercial release of products untilthe errors have been corrected. Software errors may cause us to be in breach ofour agreements with customers, which could result in termination of theagreements and monetary damages. Software errors may cause damage to ourreputation and cause us to commit significant resources to their correction.Errors that result in termination of agreements, monetary damages, losses ordelays could have a material adverse effect on our business, operating resultsor financial condition.

 

**INCREASED COMPETITION MAY RESULT IN PRICE REDUCTIONS ANDDECREASED DEMAND FOR OUR PRODUCTS AND SERVICES SOLUTIONS**

 

There are a number of other companies that sell CRM and SFA productsand related services that specifically target the pharmaceutical industry,including competitors that are actively selling CRM and SFA software productsin more than one country and competitors that also offer CRM and SFA supportservices. Some of our competitors and potential competitors are part of largecorporate groups and have significantly greater financial, sales, marketing,technology and other resources than we have.

 

While we believe that the CRM and SFA software products and/or servicesoffered by most of our competitors do not address the variety of pharmaceuticalcustomer needs that our solutions address, increased competition may require usto reduce the prices for our products and services. Increased competition mayalso result in decreased demand for our products and services.

 

We believe our ability to compete depends on many factors, some ofwhich are beyond our control, including:

 

• the number and success of new market entrantssupplying competing CRM and SFA products or support services;

• alliances among existing competitors;

• technological changes or changes in the our customers’use of the Internet;

• expansion of product lines by, or consolidation among,our existing competitors; and

• development and/or operation of in-house CRM or SFAsoftware products or services by our customers and potential customers.

 

Any one of these factors can lead to price reductions and/or decreaseddemand and we cannot assure you that we will be able to continue to competesuccessfully or that competition will not have a material adverse effect on ourbusiness, operating results or financial condition.

 

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**ITEM2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

**($IN THOUSANDS)**

 

**WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN THEINTERNET-RELATED PRODUCTS AND SERVICES MARKET NOR CAN WE PROVIDE ASSURANCESTHAT THE DEMAND FOR INTERNET-RELATED PRODUCTS AND SERVICES WILL INCREASE**

 

The success of parts of our business will depend, in part, on ourability to continue developing Internet-related products, modifying andimproving our existing products and responding to technological advances andchanging commercial uses of the Internet. We cannot assure you that ourInternet-related products and services will adequately respond to suchtechnological advances and changing uses. Nor can we assure you that the demandfor Internet-related products and services will increase.

 

Commercial use of the Internet raises potential problems with security,privacy, reliability, accessibility, quality of service and governmentregulation. These issues, if unresolved, may affect the use of ourInternet-related products. If these potential problems arise, our business,financial condition or results of operations could be materially and adverselyaffected.

 

**OUR INTERNATIONAL OPERATIONS HAVE RISKS THAT OUR DOMESTICOPERATIONS DO NOT**

 

We have expanded and may in the future expand our internationaloperations and enter additional international markets. This expansion wouldrequire significant management attention and financial resources that couldadversely affect operating margins and earnings. We may not be able to maintainor increase international market demand for our products and services. If we donot, our international sales will be limited and our business, financialcondition or results of operations could be materially and adversely affected.

 

The sale of our products and services in foreign countries accountsfor, and is expected in the future to account for, a material part of ourrevenues. These sales are subject to risks inherent in international businessactivities, including:

 

• any adverse change in the political stability oreconomic environments in these countries or regions;

• any adverse change in tax, tariff and trade or otherregulations;

• the absence or significant lack of legal protectionfor intellectual property rights;

• exposure to exchange rate risk for service revenuesand expenses which are denominated in currencies other than U.S. dollars; and

• difficulties in managing an organization spread overvarious jurisdictions.

 

Any of the above risks could have a significant impact on our abilityto deliver products on a competitive and timely basis, which could materiallyand adversely affect our financial condition or operating results.

 

Since we have operations in a number of countries and our serviceagreements in such countries are denominated in foreign currencies, we faceexposure to adverse movements in foreign currency exchange rates.  As currency rates change, translation of theincome statements of our international entities from local currencies to U.S.dollars affects period-over-period comparability of operating results.Historically we have not hedged these translation risks because we generallyreinvest our cash flows from international operations, however, we continue toevaluate foreign currency translation risk exposure.  As we continue to grow our business, the risks associated withforeign currency translation will also grow.

 

**AN INABILITY TO MANAGE GROWTH COULD ADVERSELY AFFECT OURBUSINESS**

 

To manage our growth effectively we must continue to strengthen ouroperational, financial and management information systems; ensure that we havethe appropriate infrastructure in place; and expand, train and manage our workforce. However, we may not be able to do so effectively or on a timely basis.Failure to do so could have a material adverse effect upon our business,operating results or financial condition.

 

**CATASTROPHIC EVENTS COULD NEGATIVELY AFFECT OUR INFORMATIONTECHNOLOGY INFRASTRUCTURE**

 

The efficient operation of our business, and ultimately our operatingperformance, depends on the uninterrupted use of our critical business andinformation technology systems. Many of these systems require the use ofspecialized hardware and other equipment that is not readily available in themarketplace. Although we maintain these systems at more than one location, anatural disaster, a fire or other catastrophic event at any of these locationscould result in the destruction of these systems. In such an event, thereplacement of these systems and restoration of archived data and normaloperation of our business could take several days to several weeks, or more.During the intervening period when our critical business and informationtechnology systems are fully or partially inoperable, our ability to conductnormal business operations could be significantly and adversely impacted and asa result our business, operating results and financial condition could beadversely affected.

 

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**ITEM2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

**($IN THOUSANDS)**

 

**OUR SUCCESS DEPENDS ON RETAINING OURKEY SENIOR MANAGEMENT TEAM AND ON ATTRACTING AND RETAINING QUALIFIED PERSONNEL**

 

Our future success depends, to a significant extent, upon thecontributions of our executive officers and key sales, technical and customerservice personnel.

 

Our future success also depends on our continuing ability to attractand retain highly qualified technical and managerial personnel. Due tocompetition for such personnel, we have at times experienced difficulties inrecruiting and retaining qualified personnel and we may experience suchdifficulties in the future. Our ability to expand and increase revenue growthin the future will depend, in part, on our success in recruiting and trainingsuch qualified personnel. We may not always be able to expand our personnel inthese areas as necessary to support our operations. Any recruiting or retentiondifficulties could adversely affect our business, operating results orfinancial condition.

 

**OUR BUSINESS DEPENDS ON PROPRIETARY RIGHTS THAT WE MAY NOT BEABLE TO PROTECT COMPLETELY**

 

We rely on a combination of trade secret, copyright and trademark laws,non-disclosure, license and other contractual agreements and technical measuresto protect our proprietary rights. We cannot assure you that the steps we takewill prevent misappropriation of these rights. Further, protective actions wehave taken or will take in the future may not prevent competitors fromdeveloping products with features similar to our products. In addition,effective copyright and trade secret protection may be unavailable or limitedin certain foreign countries. In response to customer requests, we have also onoccasion entered into agreements which require us to place our source code inescrow to secure our service and maintenance obligations.

 

Further, while we believe that our products and trademarks do notinfringe upon the proprietary rights of any third parties, third parties mayassert infringement claims against us in the future that may result in costlylitigation, diversion of management’s attention, the imposition of monetarydamages or injunctive relief against us. In addition, any such claims mayrequire us to enter into royalty arrangements. Any of these results couldmaterially and adversely affect our business, operating results or financialcondition.

 

**IF OUR THIRD-PARTY VENDORS ARE UNABLE TO SUCCESSFULLY RESPONDTO TECHNOLOGICAL CHANGE OR IF WE DO NOT MAINTAIN OUR RELATIONSHIPS WITH THIRD-PARTY VENDORS, INTERRUPTIONS IN THE SUPPLY OF OUR PRODUCTS MAY RESULT**

 

Some of our software is provided by third-party vendors. If ourthird-party vendors are unable to successfully respond to technological changeor if our relationships with certain third-party vendors are terminated, we mayexperience difficulty in replacing the functionality provided by thethird-party software currently offered with our products. Although we believethere are other sources for all of our third-party software, any significantinterruption in the supply of these products could adversely impact our salesunless and until we can secure another source. The absence of or anysignificant delay in the replacement of functionality provided by third-partysoftware in our products could materially and adversely affect our sales.

 

**THE RESULTS DERIVED FROM CURRENT AND FUTURE STRATEGICRELATIONSHIPS MAY PROVE TO BE LESS FAVORABLE THAN ANTICIPATED**

 

We are involved in a number of strategic relationships with thirdparties and are frequently pursuing others. Should these relationships, or anyof them, prove to be more costly than anticipated or fail to meet revenueexpectations or other anticipated synergies, we cannot guarantee that suchevents will not have a material impact upon our business, operating results orfinancial condition.

 

**OUR DATA SOLUTIONS ARE DEPENDENT UPON STRATEGIC RELATIONSHIPSWHICH, IF NOT MAINTAINED, COULD UNDERMINE THE CONTINUED VIABILITY OF THESESOLUTIONS**

 

Our data and analytics solutions are sourced, in part, from dataprovided through strategic relationships. Although we believe there are othersources for such data, the termination of any of these relationships coulddiminish the breadth or depth of our data. This termination or our failure toestablish new strategic relationships in the future could negatively impact ourbusiness, operating results or financial condition.

 

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**ITEM2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

**($IN THOUSANDS)**

 

**FEDERAL AND STATE LAWS AND REGULATIONS COULD DEPRESS THEDEMAND FOR SOME OF OUR SOLUTIONS**

 

While webelieve our data and analytics solutions are not violative of current federalor state laws and regulations pertaining to patient privacy or healthinformation, including the Health Insurance Portability and Accountability Actof 1996 (HIPAA), we cannot guarantee that future laws or regulations orinterpretations of existing laws and statutes will not impact negatively uponour ability to market these solutions or cause a decrease in demand for suchsolutions from customers that see an increased risk in any such new laws orregulations.

 

**GOVERNMENTAL REGULATION MAY MATERIALLY AND ADVERSELY AFFECTOUR ABILITY TO DISTRIBUTE CONTROLLED SUBSTANCES THROUGH THE MAIL**

 

Through the interactive marketing business we acquired in the Synavantacquisition, we may distribute controlled substances to doctors’ officesthrough the mail as part of certain interactive marketing programs provided onbehalf of pharmaceutical manufacturers. It is important to the business thatthis practice of distributing prescription-only drugs continues. Futurelegislation may restrict our ability to provide these types of services. If anysuch legislation is enacted, it could have a material and adverse effect on ourbusiness, operating results and financial condition.

 

**DIFFICULTIES IN SUBLEASING, SELLING OR OTHERWISE DISPOSING OFCERTAIN OF OUR FACILITIES MAY NEGATIVELY IMPACT UPON OUR EARNINGS**

 

We expect to sublease all or a portion of certain facilities, includingfacilities acquired as part of the Synavant acquisition. If the recent real estatedownturn continues, it could negatively impact upon our ability to effectivelymarket these facilities. We are also currently selling our Piscataway, NewJersey, facility.  An inability tosuccessfully dispose of or sublet, as applicable, any of these facilities or toobtain favorable pricing or sublease terms could negatively impact ourearnings.

 

**UNANTICIPATED CHANGES IN OUR ACCOUNTING POLICIES MAY BEREQUIRED BECAUSE OF MANDATES BY ACCOUNTING STANDARDS SETTING ORGANIZATIONS ANDCOULD HAVE A MATERIAL IMPACT ON OUR FINANCIAL STATEMENTS**

 

In reporting our financial results we rely upon the accounting policiesand standards then in effect at the time of our report. Future regulations,standards or interpretations may require us to adjust or restate financialresults previously reported. A required restatement could have an unfavorableimpact upon past financial results or current comparison to previous results.

 

**WE MAY FACE RISKS ASSOCIATED WITH EVENTS WHICH MAY AFFECT THEWORLD ECONOMY**

 

World events such as terrorist attacks, the current U.S. militaryaction in the Middle East and elsewhere, and hostilities in the Middle East,Asia and other geographical areas, have and may continue to weaken the U.S. andworld economies.  We can not guaranteethat any resultant weaknesses in these economies will not adversely affect ourbusiness, financial condition or results of operations or the businesses of ourcustomers.

 

**PROVISIONS OF OUR CHARTER DOCUMENTS AND NEW JERSEY LAW MAYDISCOURAGE AN ACQUISITION OF DENDRITE**

 

Provisions of our Restated Certificate of Incorporation, as amended,our By-laws, as amended, and New Jersey law may make it more difficult for athird-party to acquire us. For example, the Board of Directors may, without theconsent of the stockholders, issue preferred stock with rights senior to thoseof the common stock. In addition, we have a Shareholder Rights Plan which maylimit the ability of a third-party to attempt a hostile acquisition of theCompany.

 

**OUR COMMON STOCK MAY BE SUBJECT TO PRICE FLUCTUATIONS**

 

The market price of our common stock may be significantly affected bythe following factors:

 

• the announcement or the introduction of new productsand services by us or our competitors;

• quarter-to-quarter variations in our operating resultsor changes in revenue or earnings estimates or failure to meet or exceedrevenue or earnings estimates;

• market conditions in the technology, healthcare andother growth sectors;

• general consolidation in the healthcare informationindustry which may result in the market perceiving us or other comparablecompanies as potential acquisition targets;

• the gain or loss of significant orders;

• changes in the domestic and international economic,political and business conditions; and

• future acquisitions.

 

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**ITEM2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

**($IN THOUSANDS)**

 

Further, the stock market has experienced on occasion extreme price andvolume fluctuations. The market prices of the equity securities of manytechnology companies have been especially volatile and often have beenunrelated to the operating performance of such companies. These broad marketfluctuations may have a material adverse effect on the market price of ourcommon stock.

 

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**ITEM 4.  Controls andProcedures**

 

The Company’s Chief Executive Officer and Chief Financial Officer, withthe assistance of other members of the Company’s management, have evaluated theeffectiveness of the Company’s disclosure controls and procedures as of the endof the period covered by this Quarterly Report on Form 10-Q.  Based on such evaluation, the Company’sChief Executive Officer and Chief Financial Officer have concluded that theCompany’s disclosure controls and procedures are effective.

 

The Company’s Chief Executive Officer and Chief Financial Officer havealso concluded that there have been no changes in the Company’s internalcontrol over financial reporting during the quarter ended March 31, 2004that have materially affected, or are reasonably likely to materially affect,the Company’s internal control over financial reporting.

 

**PARTII.  OTHER INFORMATION**

 

**ITEM 6.****                             Exhibitsand Reports on Form 8-K**

 

(i)  Exhibits

 

**31.1**     Certification of John E.Bailye, Chairman of the Board and Chief Executive Officer of the Company,pursuant to Securities Exchange Act Rule 13a-14(a).

 

**31.2**     Certification of KathleenE. Donovan, Senior Vice President and Chief Financial Officer of the Company,pursuant to Securities Exchange Act Rule 13a-14(a).

 

**32**        Certifications Pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, signed by John E. Bailye, Chairman of the Board andChief Executive Officer of the Company, and Kathleen E. Donovan, Senior VicePresident and Chief Financial Officer of the Company.

 

(ii)  Reports on Form 8-K

 

(a)          TheCompany furnished a Current Report on Form 8-K on January 29, 2004,pursuant to “Item 12. Results of Operations and Financial Condition” relatingto its results for the fourth quarter and full year 2003.

 

(b)         TheCompany furnished a Current Report on Form 8-K/A on January 30, 2004,pursuant to “Item 12. Results of Operations and Financial Condition” relatingto its results for the fourth quarter and full year 2003.

 

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Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 

Date: May 7, 2004

 

 
|   | By:                                                                      | /s/ John E.  Bailye      |   |
|--------|--------------------------------------------------------------------------|--------------------------|--------|
|   | John E. Bailye,  Chairman of the Board and  Chief Executive Officer      |
|   | (Principal  Executive Officer)                                           |
|   |                                                                     |                     |
|   | By:                                                                      | /s/ Kathleen E.  Donovan |   |
|   | Kathleen E.  Donovan, Senior Vice President  and Chief Financial Officer |
|   | (Principal  Financial Officer)                                           |

 

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**EXHIBITINDEX**

 
| **Number** |   | **Description**                                                                                                                                                                                                                                                                                                              |
|------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                                         |
| 10.31      |   | New Hire Option  Grant Authorization – Updated Appendix.                                                                                                                                                                                                                                                                |
|       |   |                                                                                                                                                                                                                                                                                                                         |
| 31.1       |   | Certification of John E. Bailye, Chairman of the Board and Chief  Executive Officer of the Company, pursuant to Securities Exchange Act Rule  13a-14(a).                                                                                                                                                                     |
|       |   |                                                                                                                                                                                                                                                                                                                         |
| 31.2       |   | Certification of Kathleen E. Donovan, Senior Vice President and Chief  Financial Officer of the Company, pursuant to Securities Exchange Act Rule  13a-14(a).                                                                                                                                                                |
|       |   |                                                                                                                                                                                                                                                                                                                         |
| 32         |   | Certifications Pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by  John E. Bailye, Chairman of the Board and Chief Executive Officer of the  Company and Kathleen E. Donovan, Senior Vice President and Chief Financial  Officer of the Company. |

 

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